Covid-19 has created a revolution in the electricity sector: regulation must keep up

The pandemic has created a unique opportunity for Ofgem to provide a framework that embraces flexibility and incentivises networks to facilitate the transition to net zero, writes James Crouch of Burns & McDonnell

As Covid-19 continues its grip, we face huge uncertainty about what demands the future holds for electricity networks. There have already been seismic effects as a result of the disruption, including a 73 per cent reduction in vehicular traffic in the United Kingdom at the height of lockdown and subsequent decreases in air pollution. Working from home will likely be more common going forward, causing fundamental shifts in power usage. In addition, the drive toward net zero will place unique demands on electricity networks. We also face difficult and unpredictable global financial challenges as a result the ongoing pandemic.

How will all of this affect the RIIO-2 price controls framework?

The current situation

In its latest open letter to UK network operators, Ofgem praised network companies for “the impressive performance they have delivered” over the last few months, during what Ofgem hopes will prove to be the most challenging period of the pandemic. As government restrictions have eased, Ofgem has stated it expects the networks to comply with all regulatory obligations whilst keeping their supply chain, their customers and their employees safe. Ofgem’s CEO, Jonathan Brealey, also suggested recently that the network companies need to play their part in the post-Covid-19 recovery by considering their social contract with customers, many of whom will feel the effects of the impending recession.

Even with the electric utility companies changing their working ways to deliver essential services, there may be a silver lining. Although most utilities will face an overall reduction in profit this year, interest rates have been reduced significantly. Some utilities will therefore find it prudent to borrow more and invest in renewables and smart grid systems to help meet the 2050 net-zero target. SSE, for example, has unveiled a plan to spend more than £7 billion on major low-carbon infrastructure projects over the next five years in onshore and offshore wind projects, grid upgrades and other low-carbon initiatives. It has also committed to reduce carbon emissions by 60 per cent by 2030.

Whilst the government has set out its plan for investing £250 billion to fund infrastructure projects (Project Speed), the power industry should also provide a stimulus for economic recovery through investment in renewables and delivering smart grid projects such as the E-PORT Smart Energy Master Plan in the North West.

It is vital that the RIIO-2 model builds in flexibility to respond to these changes, both for increased investment in transmission systems and for adapting to greater electrification. RIIO-2 must also incentivise network companies further to reduce carbon emissions and facilitate the regulatory changes required to transition to net-zero emissions.

Future outlook

If working from home becomes the new norm for many companies, there will be corresponding reductions in demand from office-based facilities. People will be less governed by routines and strict adherence to times for commuting or the school run. The typical morning demand peak will flatten, and as we transition to an EV future, the reduction in travel could also mean that EVs are charged less frequently, further reducing strain on the grid. Thus, networks will be able to plan more effectively and reduce the amount of network reinforcement required by utilising existing electrical assets to their potential.

However, industry will still require power, and the drive toward net zero will increase electricity demand in certain sectors. The desire for more offshore wind will require investment in transmission systems to bring the power to where it will be needed. The question is how this will affect funding for RIIO-2 for the electricity network companies. The need to innovate and invest in the networks will be even more important, and the need for supply chain capacity to deliver future programmes of work will be critical.

Regulatory funding is based on predictable financial trends. If the current uncertainty continues in global markets, cost-of-capital forecasts will no longer be as accurate. This will result in greater uncertainty when modelling a five-year regulatory period. The volatility and uncertainty in the markets may also represent an added risk to investors, potentially stunting the investment growth in renewable and smart grid projects. However, with historically low interest rates in the UK, now is a rare opportunity to invest in sustainable technologies and power systems to reduce carbon emissions whilst providing a stimulus to the economy.

Targeted investments

As we move towards a more sustainable economy, we will need to see investment in training and development of essential skills needed for the power generation supply chain to deliver the required programmes of work. We must not forget the lessons learned from the current pandemic in investing in critical infrastructure and services to permit continued operations as we continue to navigate it.

The pandemic has highlighted that having a robust supply chain in place is critical. There will be tough times ahead, but investing in electrical infrastructure is more important than ever. It will support economic recovery and further progress towards a green economy.

Covid-19 has tested all of us and challenged our thinking. This is a unique opportunity for the government in general and Ofgem in particular to provide a flexible legislative and regulatory framework that will deliver the resources needed to continue safe, efficient, secure and reliable utility operations.